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IMF: FINLAND Staff Report -- September 2010

IMF: FINLAND Staff Report -- September 2010

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...Despite strong fundamentals, Finland has been dealt a severe blow by the global crisis. GDP fell almost 8 percent in 2009—the worst in the euro area—reflecting adverse trade and financial international spillovers....
...Despite strong fundamentals, Finland has been dealt a severe blow by the global crisis. GDP fell almost 8 percent in 2009—the worst in the euro area—reflecting adverse trade and financial international spillovers....

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Published by: FloridaHoss on Sep 06, 2010
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© 2010 International Monetary Fund
September 2010IMF Country Report No. 10/273August 6, 2010 August 25, 2010 January 29, 2001June 7, 2010 2010 August 6, 20010
Finland: 2010 Article IV Consultation—Staff Report; Staff Statement; PublicInformation
N
otice on the Executive Board Discussion; and Statement by the ExecutiveDirector for Finland
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions withmembers, usually every year. In the context of the 2010 Article IV consultation with Finland, thefollowing documents have been released and are included in this package:
 
The staff report for the 2010 Article IV consultation, prepared by a staff team of the IMF,following discussions that ended on June 7, 2010, with the officials of Finland on economicdevelopments and policies. Based on information available at the time of these discussions,the staff report was completed on July 29, 2010. The views expressed in the staff report arethose of the staff team and do not necessarily reflect the views of the Executive Board of theIMF.
 
A staff statement of August 25, 2010 updating information on recent developments.
 
A Public Information Notice (PIN) summarizing the views of the Executive Board asexpressed during its August 25, 2010 discussion of the staff report that concluded theArticle IV consultation.
 
A statement by the Executive Director for Finland.The policy of publication of staff reports and other documents allows for the deletion of market-sensitiveinformation.
Copies of this report are available to the public fromInternational Monetary Fund
Publication Services700 19
th
Street, N.W.
Washington, D.C. 20431Telephone: (202) 623-7430
Telefax: (202) 623-7201E-mail:publications@imf.orgInternet: http://www.imf.org
International Monetary FundWashington, D.C.
 
INTERNATIONAL MONETARY FUNDFINLAND
Staff Report for the 2010 Article IV Consultation
Prepared by the Staff Representatives for the 2010 Consultation with FinlandApproved by Ajai Chopra and Jan Kees MartijnJuly 29, 2010
E
XECUTIVE
S
UMMARY
 Despite strong fundamentals, Finland has been dealt a severe blow by the global crisis
.GDP fell almost 8 percent in 2009—the worst in the euro area—reflecting adverse trade andfinancial international spillovers. Generous pay raises have supported consumption, but alsoled to an erosion of external competitiveness, which however remains adequate. A subduedresumption of activity is projected for 2010–11, with growth remaining well below potential.
There was agreement that the financial sector weathered well the global turmoil, butcontinued prudence and improvements to supervision are needed
. Stress tests of the banking system are benign, but do identify credit, liquidity, and concentration as the sourcesof risk. Banks should be cautious in engaging in higher risk activities—like unexpectedlystrong mortgage lending amid recently surging home prices. Officials agreed that it is crucialto boost the effectiveness of supervision and crisis management for large cross-border institutions as well as mitigate too-big-to-fail risks. The authorities broadly endorsed EU andBasel initiatives to reform supervision and regulation, but are concerned about burdensharing arrangements and the impact on bank funding and credit.
The consensus was that the fiscal position has weakened considerably and early credibleadjustment is required
. The large increase of the budget deficit in 2009–10 reflectssubstantial discretionary stimulus as well as the cyclical downturn. Staff views the relaxationas appropriate, but the fiscal sustainability gap has risen substantially. The authoritiescontemplate ambitious fiscal tightening in 2011—1½ percent of GDP. With negative outputgaps forecast through 2014, staff advised a more measured pace of consolidation unless clear evidence emerges of more robust growth. Beyond 2011, the authorities broadly supportedstaff’s recommended aim to close the sustainability gap by 2020, with focus on expenditurecontainment and tax base broadening.
Further structural reforms would alleviate the adverse impacts of the crisis andpopulation aging on growth, and facilitate fiscal consolidation
.
 
 Nevertheless, no major actions are envisaged before the 2011 general election.
 
2Contents PageExecutive Summary ...................................................................................................................1
 
I. Economic Situation and Outlook ............................................................................................4
 
II. Policy Discussions...............................................................................................................18
 
A. Maintaining Financial Stability ...............................................................................18
 
B. Fiscal Policy ............................................................................................................21
 
C. Structural Reforms ..................................................................................................26
 
D. Exit Strategy ............................................................................................................27
 
III. Staff Appraisal ...................................................................................................................27
 
Analytical Note 1: Macro-Financial Linkages .........................................................................49
 
A. Financial Conditions ...............................................................................................50
 
B. Imbalances in the Credit Market .............................................................................51
 
C. Credit Channel.........................................................................................................53
 
D. Conclusions .............................................................................................................54
 
Analytical Note 2: International Trade and Financial Spillovers ............................................58
 
Analytical Note 3: The Crisis and Potential Output in Finland ...............................................62
 
Analytical Note 4: External Competitiveness .........................................................................66
 
Analytical Note 5: Long Run Fiscal Sustainability in Finland ................................................69
 
A. Recent Fiscal Developments and Outlook ..............................................................69
 
B. Fiscal Sustainability has Deteriorated .....................................................................70
 
C. Measures to Achieve Sustainability ........................................................................74
 
Tables1. Main Economic Indicators, 2004–11 ...................................................................................30
 
2. Indicators of Financial Vulnerability, 2005–10 ...................................................................31
 
3. General Government Accounts, 2007–11 ............................................................................32
 
4. Balance of Payments, 2005–11 ............................................................................................33
 
5. Net International Investment Position, 2001–09 .................................................................34
 
6. Trade by Regions and Countries, 2009 ................................................................................35
 
7. Headline Support for Financial and Other Sectors and Upfront Financing Need ...............36
 
8. Summary of State Interventions in Major Financial Institutions .........................................37
 
9. Proposed Fiscal Measures ....................................................................................................38
 
Figures1. Growth and Inflation, 2000–11 ............................................................................................40
 
2. Labor Market Developments, 1990–2009 ...........................................................................41
 

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